Hi Scott -- If by "edge" you mean "expectancy", then it is well understood as being very important and often discussed in this forum.
Or do you have a different, and quantifiable, definition of "edge"? Thanks, Howard On Wed, Sep 8, 2010 at 9:48 AM, sdwcyberdude <[email protected]> wrote: > > > Good points. > > I strive to spend 90% of my focus on deriving and measuring the underlying > edge, why does it exist, when did it exist & does it still exist, how is it > captured + measured. Last 10% is spent on the system metrics, etc. The big > dog, "The Edge", seems not to be discussed very much by many people. > > Regards, > Scott > > --- In [email protected] <amibroker%40yahoogroups.com>, "tf28373" > <tom...@...> wrote: > > > > I strongly agree. This is the moment when Ulcer Performance Index steps > in - check this one out, since it is based on measuring risk in the terms of > drawdown regarding its duration. By the way thanks for your comments about > Omega - it seems that on the one hand AIRAP can add something positive into > system performance analysis, on the other - it has some drawbacks. > > > > Anyway my mind is still overoccupied by the idea of deriving the system > virtues and equity line features from simple mean - deviation analysis > (together with using such indicators like profit factor, power factor, > expectation). Have you ever ponder on this one? > > > > --- In [email protected] <amibroker%40yahoogroups.com>, > "sdwcyberdude" <scwalker1986@> wrote: > > > > > > Tomasz, > > > > > > I also use and see value in the Max DD, however, I believe it is should > only be a "secondary" measure. > > > > > > Think of a 10 year backtest. System X has 1 drawdown of 30% (max), and > many small drawdown never exceeding 5%. System Y has 1 drawdown of 25% > (max), and 10+ other drawdowns between 20 and 23%. > > > > > > Which system is more "stable"? I will invest risk capital in System X, > which has the higher max drawdown, but much fewer drawdowns of depth. > > > > > > I would love to have a measure of drawdown that more directly and > intuitively measures the depth and frequency of drawdowns per unit of time. > Correlation of the equity curve also gets at that point. > > > > > > Regarding the Omega, I am relying on a friend who studied both the > advanced math and models and uncover significant concerns with the Omega (I > seem to recall in was bias issues around skewness and kurtosis, but I might > be wrong), however it was unpublished work for hedge funds. He also > developed a proprietary alternative. Sorry I can't be more helpful on that > one. > > > > > > Kind Regards, > > > Scott > > > > > > --- In [email protected] <amibroker%40yahoogroups.com>, > "tf28373" <tomfid@> wrote: > > > > > > > > Hi Scott > > > > > > > > Thanks for response. I agree that the Sortino ratio is a kind of > solution to the typical Sharp ratio disadvantages (like penalization high > moments, which for me is irrational). Nevertheless, there is no max dd taken > into account, which confuses me a bit. However, I might be too devoted to > this risk measure (max dd) - what do you think? Is mean and its variance > better/sufficient values as far as the characteristics of equity line is > considered? (This is what brain123 was supporting in many discussions.) > > > > > > > > "One should be careful if it is built upon the Omega, which I believe > introduces other problems." > > > > > > > > That is an interesting point - can you elaborate a bit on this one? > In fact I was hoping to get this kind of information when starting this > thread as - frankly speaking - I don't feel familiar with plain maths enough > to analyse it... > > > > > > > > Looking forward to your response. > > > > Regards > > > > Tomasz > > > > > > > > --- In [email protected] <amibroker%40yahoogroups.com>, > "sdwcyberdude" <scwalker1986@> wrote: > > > > > > > > > > Tomasz, > > > > > > > > > > Thanks for raising this question (and for the good work you do). > > > > > > > > > > The Sortino Ratio is a well regarding improvement upon the Sharpe; > I urge you to consider adding the Sortino to the base metric array. Is there > a reason you passed on it earlier? > > > > > > > > > > The Sharpe ratio has a lot of problems and I was not familiar with > the AIRAP. One should be careful if it is built upon the Omega, which I > believe introduces other problems. > > > > > > > > > > Regards, > > > > > Scott > > > > > > > > > > --- In [email protected] <amibroker%40yahoogroups.com>, > "tf28373" <tomfid@> wrote: > > > > > > > > > > > > > > > > > > Hello everyone > > > > > > > > > > > > I have been working on the choose of fitness function following > the > > > > > > Howard Bundy's advices in his "Quantitative Trading Systems" and > come > > > > > > across M. Sharma's Alternative Investments Risk Adjusted > Performance > > > > > > (AIRAP). > > > > > > > > > > > > The equation of it is as following: > > > > > > > > > > > > AIRAP = [ E pi*(1+TRi)(1-c) ] 1/(1-c) - 1, > > > > > > > > > > > > where TRi - ith period total fund return (in my opinon it can > also be > > > > > > ith trade net return), c - risk aversion parameter (author > suggests to > > > > > > set its value to c=4), i=1,...,N - number of periods (as for me > it can > > > > > > be number of trades), pi - the probability of the ith period's > total > > > > > > return (according to the author it can be replaced with 1/N). > (For > > > > > > futher information please check this working paper: > > > > > > http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf > > > > > > <http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf> > .) > > > > > > > > > > > > M. Sharma argues that this measure captures all higher moments, > > > > > > penalizes for higher volatility and leverage (downside risk is > penalized > > > > > > more) and has all merits of Sharp ratio, though without its > limitations > > > > > > and disadvantages. I have carried out some simulations on the > artificial > > > > > > returns of different distributions and indeed it makes some > difference. > > > > > > Nevertheless what I am suspicious about is the fact that it was > the very > > > > > > first time I found this objective function even though it was > created by > > > > > > Sharma about 5 years ago. As for me it can mean that AIRAP is in > fact > > > > > > far from being effective or/and practical fitness measure at > least for > > > > > > trader like us and nobody use it (maybe I am wrong...). Another > issue > > > > > > that concerns me a bit is omission of MaxDrawDown in the > equation, which > > > > > > - at least for me - is a very important risk measure. According > to many > > > > > > experienced wise people writing on this forum (like ex Mr Bundy), > an > > > > > > effective fitness function shouls take Max DD or some comparable > risk > > > > > > measure into consideration in order to be really useful. > > > > > > > > > > > > What do you think about AIRAP? Should I proceed with utilizing > this > > > > > > function? > > > > > > > > > > > > I am looking forward to your response. Thank you in advance. > > > > > > > > > > > > Tomasz > > > > > > > > > > > > > > > > > > > > > > >
